Points: They're Not Just for Credit Cards

What happens if you’ve worked hard for your credit score and down payment, but your interest rate is still high? Can you buy your way to a better interest rate? Probably. But more importantly, should you do it? That depends.

What are discount points anyway?

Think of a discount point as a way of prepaying your interest. On a 30 year mortgage, each point usually costs one percent of your loan amount and lowers your interest rate by 0.125 percent. So if your loan is for $100,000, one point will cost $1,000. So, is it worth it?

How long are you staying?

The big question is how long are you planning on staying in your home? Even if you buy enough points to lower your interest rate by two percent, that low interest rate won’t save you any money if you move too soon.

So what’s the magic number when it comes to years? First, you’ll have to calculate how much money you’ll save each month with a lower interest rate. Divide the amount you spent on points by the amount you’ll save each month. That number will tell you how many months it’ll take for you to break even. If you plan on moving before that date, you’ll actually be losing money by buying points.

But remember, the unexpected can always happen. You might need to relocate for work. You might get married and need to sell your home. Or you might need to buy a bigger home for your growing family.

Other expenses

Remember, buying a home costs more than just your mortgage. You also have to think about closing costs, taxes, HOA dues, and insurance. So if spending your savings on discount points means you can’t pay your HOA dues, it’s not worth it.

In that case, you can consider either buying fewer points or not buying any at all. Don’t panic over your interest rate. In a couple years, you might find yourself making a lot more money or the interest rates going down. You’ll either be able to pay extra on your mortgage or refinance your home for that lower interest rate (or both!).